Buying A Home: Closing the Deal

Final Closing Statement

You may believe that the most important piece of paper you get when closing is the deed to your new home. From an accounting standpoint, however, the most important piece of paper is the final closing statement that you get on the day that your home actually closes.

The final closing statement is like your checkbook. The final closing statement records all the money related to your home purchase:

Credits: Any money that you paid in advance (such as your initial deposit and down payment) appears as a credit to your account. You may also receive credits from the seller for such things as corrective work repairs and property taxes. And, of course, your loan is a credit

Debits: Funds paid out in your behalf are shown as debits. Your debits include modest and not-so-modest expenses, such as what you graciously paid the seller for your dream home, loan fees, homeowners-insurance premiums, and property inspection fees.

Several days before closing, you'll be given an estimated closing statement detailing what your closing costs will be if the home closes as scheduled. Check the estimated closing statement extremely carefully, line-by-line and from top to bottom, to be absolutely certain that it accurately reflects your credits and debits. Closing officers are human -- they sometimes make mistakes. So do other parties in the transaction who may have given the closing officer incorrect information. It's your money on the table. Pay attention to detail. Review the closing statement and question whatever isn't clear or correct.

The final closing statement is extremely important. Keep a copy for your files -- it will come in handy when the time comes to complete your annual income tax return. Some expenses (such as loan origination fees and property tax payments) are tax deductible. Furthermore, the closing statement establishes your initial tax (cost) basis in the property. When you're ready to sell your property, you may owe capital gains tax on any profit you've made by selling the property for more than your cost basis.

Possession Options

When can you actually take possession of your home and move into it? That depends on the terms of your contract. Here are your usual options:

Move in the same day of closing
This is fine if the sellers have already moved out. If, however, the sellers haven't moved yet and don't want to deliver possession until they're absolutely 100 percent certain of closing, you have a logistical problem. For two moving vans to occupy exactly the same driveway at exactly the same time borders on the impossible. Moving into a house while someone else is moving out is something you'll never attempt more than once. There are easier ways to go crazy.

Move in the day after closing
We recommend this alternative if the sellers won't deliver possession until closing. Let the sellers have the day of closing as their moving day. After all, the sellers are still the owners until title transfers. Moving day is stressful, even under the best of circumstances. Why create unnecessary stress for yourself by trying to move in as the sellers are leaving?

After the sellers vacate, but before your movers bring your belongings into the house, check your new home carefully for damage that may have been caused by the sellers' movers. When movers are involved, accidents can happen.

Whether you move into your home the day of closing or the following day, you start paying for utilities and homeowners insurance effective the day that it closes. Don't forget to coordinate phone installation and resumption of utility services, if necessary, with the proper companies a couple of weeks prior to the scheduled closing.

Move in after a seller rent-back
It's not uncommon for sellers to remain in their house for several weeks after closing while waiting to get into their new home. In that case, you sign a separate rent-back agreement with them that becomes part of your purchase contract. The rent-back agreement covers such things as who pays for utilities and maintenance, what happens if there's property damage, how much rent the sellers pay you, and what the penalties are if the sellers don't vacate the property on the date specified in the rent-back.

It's customary for the sellers to pay rent equal to what you're paying for principal and interest on your mortgage, plus property taxes and insurance, so that you don't have out-of-pocket expense on what it costs you to own the house during the term of their rental. The amount equaling principle, interest, taxes, and insurance (known as PITI) is prorated on a per-day basis from closing until the sellers vacate.

If the home you're buying is vacant, you may be tempted to ask for permission to start fixing the house up before closing. After all, painting or waxing floors, for example, is much easier and faster when the house is empty. Don't do it. If the deal falls through, you've spent your time and money fixing up someone else's house. If the house catches fire, you don't have insurance to cover your losses. The risk exceeds the reward. Instead, allow some time to do these tasks after closing and before moving in.

Final Verification of Condition
Read the "Final Verification of Condition" clause in your purchase contract. If your state's contract doesn't have this type of clause in it, instruct your agent or lawyer to write such a clause into your contract.

We urge you to inspect the property a few days (ideally the day) before closing. Why? To be sure that the property is still in the same general condition that it was in when you signed the contract to buy it. What if the sellers knocked a big hole in the kitchen wall during a wild party? What if they forgot to water the lawn and it turned into a rock garden? What if a sinkhole appeared smack-dab in the middle of the driveway? The "what ifs" are endless.

You'll probably find that everything is fine. But if it isn't, you can discuss your options with your agent and/or attorney. Such an action always gets the seller's attention. If you and the seller can't work out a mutually satisfactory solution, you may have to kill the deal. Killing the deal is better than buying a problem.

Joint Tenancy
One of the most important decisions that you can make when buying a home is how you take title in the property. If you're unmarried, your choices are simpler because you take title as a sole owner. When two or more people co-own a property, however, the number of ways to take title multiplies dramatically. Each form of co-ownership has its own advantages, disadvantages, tax consequences, and legal repercussions.

Here are some forms of co-ownership and the advantages of each type:

Joint tenancy
Suppose, for example, that you and your spouse buy a house together as joint tenants. When your spouse dies 20 years from now, ownership of the house automatically transfers to you without going through probate. This feature of joint tenancy co-ownership is known as the right of survivorship.

There are also tax benefits. You also get a stepped-up basis on your spouse's half of the house. When you sell the house, this may save you big bucks on the capital gains tax. Here's an example.

Community property
Only married couples can take title as community property. Compared to joint tenancy, an advantage of community property co-ownership is that both halves of your house get a stepped-up basis upon the death of your spouse. This gives you even bigger tax savings.

Using the same figures as the joint tenancy example, as the surviving spouse, your cost basis is the full $300,000. Capital gains tax is forgiven on every penny of appreciation in value between the date of purchase and time your spouse died. Another advantage of community property co-ownership is the ability to will your share of the house to whomever you wish. Due to the right of survivorship, this choice isn't possible when title is held as joint tenants.

Tenants-in-common or partnerships
Holding title as tenants-in-common or in the form of a partnership doesn't give you a stepped-up basis upon the death of a co-owner. This creates an obvious disadvantage from a tax standpoint.

Offsetting legal advantages exist, however, for unrelated persons who take title either as tenants-in-common or as a partnership. Under these forms of co-ownership, you generally have the right to will or sell your share of the property without permission of the co-owners. Furthermore, co-owners don't have to have equal ownership interests in the property -- a nice feature for people who just want a small piece of the action.

Buyer's Remorse
Buyer's remorse is the sinking feeling that you paid way, way too much for your new home. Buyer's remorse is compounded by many other anxieties -- that you're getting the world's worst mortgage, that the bottom will fall out of property values in the years after you buy a home, that you'll lose your job and that your health will fail.

We're here to help you deal with fear of overpayment. Those other anxieties are absolutely normal reactions to the uncertainties most of us initially experience. They will go away. If it makes you feel any better, nearly all homebuyers are traumatized by the same concerns while purchasing a home.
You can't deal with buyer's remorse until you accept it for what it is -- raw, naked fear. After you've signed the contract to buy your dream home, you do one or more of the following:

Read ads in the real estate section of your local newspaper even more intently than you did before you signed the contract. You're searching for similar or nicer houses with lower asking prices. (You forget that most houses read a lot better in ads than they eyeball when you tour them.)

Spend Saturday and Sunday touring open houses. Reading ads isn't enough for you. You pound the pavement, looking for better buys than you got. Seeing, after all, seeing is believing. (Speaking of seeing, you may see the remorseful sellers making the rounds of the same houses that you're looking at, trying to find less-nice properties with bigger asking prices.)

Discuss your purchase with friends, neighbors, business associates, and the guy standing behind you while you wait in line to buy movie tickets. (You accept as gospel any wild guess they make that confirms your suspicions.)

After going through these exercises prior to closing and for a couple of months after the purchase (until you're emotionally and physically exhausted), you'll probably discover that your fears are groundless. There's nothing wrong or unusual about your concerns. What is wrong is letting these fears gnaw away at you secretly instead of openly confronting them.

Facts defeat fear.
The faster you get the facts you need, the less you'll suffer.

A home can have more than one correct price. Pricing and negotiation are arts, not precise sciences. Don't beat yourself up with asking prices. You're okay as long as your home's purchase price is in line with the sale prices of comparable houses.

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